Patent Holder Sues McAfee, Gets $25 Million... But May End Up Losing $5 Million Due To Everyone It Has To Pay Off [Update]

from the this-is-fun dept

A few years ago, we noticed the troubling trend of private equity firms raising capital solely for the purpose of investing in patent lawsuits. Basically, these private equity guys saw the ridiculous awards being handed out to patent holders who did nothing, and realized they wanted in on the game. So they raised funds of hundreds of millions of dollars, and basically approached different small patent holders, examined their patents, and basically promised to bankroll lawsuits against companies who actually did stuff, in exchange for a cut of the winnings. One of the biggest players in this space (perhaps the largest outside of Intellectual Ventures) is Altitude Capital Partners.

Joe Mullin has uncovered some of the details of how Altitude works (and how some of these lawsuits work), because Altitude is upset with the amount of money it got back from one of the patent holders whose lawsuit it "invested" in. Note, here, that it does not appear that Altitude invested in the company in question, DeepNines, but specifically in the lawsuit. Altitude gave DeepNines $8 million for its lawsuit in the structure of a loan. DeepNines sued security firm McAfee and worked out an eventual $25 million settlement. How much did DeepNines actually get? Less than $800,000 -- and even that's in dispute. (Updated in the next paragraph).

Basically, because Altitude had a "model" of what it felt DeepNines should get in a lawsuit, and that model popped out a $200 million award, it felt that it didn't get enough. But the breakdown suggests it did fine. DeepNines paid back the loan at a 10% interest clip, plus another $700,000 as its "contingency fee" on the winnings, adding up to $10.1 million. Then DeepNines ended up having to pay its lawyers at Fish & Richardson over $11 million in fees, plus another $1.25 million to local lawyer (and former federal judge) Robert Parker. DeepNines also had to pay additional expenses for travel and other legal costs, adding up to another $2.1 million. In the end, it was left with less than $800,000. Doesn't seem quite worth the effort. (Update: Good discussion in the comments suggesting that the math here doesn't quite add up, and DeepNines may have actually ended up with about $8.8 million, because you have to add the original $8 million investment to the $25 million in counting in the inflow. That makes sense, so the numbers may be off. I was initially relying on the report claiming $800k was leftover, but it may have actually been higher. The rest of the story does make sense however).

Especially since Altitude is demanding another $5.3 million, saying that DeepNines should have calculated its contingency fee based on the overall award, not after subtracting legal fees. Of course, if it did that, then DeepNines -- despite having "won" $25 million, will have lost nearly $5 million on the overall deal. Be careful who you partner with. This should be a huge warning to any patent holders who think about accepting money from a firm like Altitude. Even a $25 million "win" can turn into a huge loss, if you're not careful.

federal judge?

Re: Your math is off

"Of the $10.1 million paid to Attitude, $8 million was received as a loan earlier. So the total cost will be $2.1 million. Therefore the final profit, will not be $800 thousand, but $8.8 million."

I was going to say the same thing, but I truly blow monkey schlong when it comes to math, plus it's late in the day, and I recently gave up coffee (why? Because apparently I enjoy being a complete zombie).

The story still holds water in what a bunch of douchebags ACP are.

Attention dumb fucks: The justice system of America is NOT something to played with for profit, nor invested in. It's for fucking JUSTICE.

11,000,000 - lawyer fees
1,250,000 - local lawyer who is former federal judge
(Above are law fees)

2,100,000 - misc charges
(Some traveling expenses, etc)

End profit: 800.000 (For DeepNines) from 25,000,000 winnings in lawsuit and an extra lawsuit that might cost 5,000,000 when the company has about 7,000,000 or so in total assests (The 7 mill is from the link ... it was 6, 7, or 8 ... not sure which so picked the 7)

Re: Your math is off

Re: Your math is off

Of the $10.1 million paid to Attitude, $8 million was received as a loan earlier. So the total cost will be $2.1 million. Therefore the final profit, will not be $800 thousand, but $8.8 million.

Hmmmm. Good point. I didn't do the math. I was just relying on Mullin's reporting, which claims DeepNines was left with just $800k. It could be that his math was off, or that there were other expenses not accounted for. I'll update the post though.

Re:

Not knowing the full details, but how long did the case go on for and how many people were involved?

Could have a law firm with 4-10 lawyers working on the case for 3-4 years, plus their expenses (travel, expert witnesses, etc etc).

Let's say 8 laywers working on average each 15 hours/week over 4 years. 15*8*52*4 = ~25000 hours. Which gives $440/hour average. Some of those could be partners ($600+ hour) or more junior lawyers ($150/hour). This doesn't even cover expenses such as travel, hotel bills, expert witnesses, document discovery, 3rd party investigators (PI's, expert witnesses, researchers) and so on. Which would probably bring the average down from $440/hour to closer to $300/hour. Of course, the actual lawyer themselves don't see that hourly figure, as the firm takes a cut of that so the lawyer would probably be lucky to see 1/2 that hourly rate. Still pretty excessive tho. But I wouldn't be complaining if someone would pay me $200-$300/hour, hell, I'd be happy with $100

Of course, if this was a 2 man law firm that worked on this for 2 years, then $11mill is a tad excessive ;)

McAfee serial infringer loses again

Mike,

Thanks so much for showing your concern about very small companies and Individual Inventors! We really appreciate your article and suggestion that we be very careful with the downside allocation of an enforcement litigation deal with willing backers like Altitude. Too bad the system does not make serial infringers like McAfee pay the legal costs of a suit which can pass the Summary Judgement test (that is the subject claimed is not on its face a meritless suit).

Individual Inventors need to band together so that when no alternative but litigation is left to enforce a patent, they can get help with example deals and lists of litigation investors.

Numbers in my story

Thanks all for the interest and discussion about the numbers.
To be clear, I'm reporting on the money that's being argued about in the Altitude Nines v. DeepNines lawsuit, which both sides refer to as "Net IP Revenue" and "Gross IP Revenue" -- in other words, how the $25 million should get divided up. So when I wrote that DeepNines "wound up with less than $800,000," that is DeepNines' own calculation of how much it got out of that $25 million.
DeepNines also took out loans, including $8 million from Altitude, to fund the litigation, which I mentioned in the story. Because the documents in my possession don't clearly show what happened to that money, I'm not speculating about the company's overall financial condition.
I've added a few documents to the post that show more clearly where I got the numbers I used in the story (scroll to bottom) --
http://bit.ly/3M0Zv0

Government intervention

Patent litigation has, indeed, become big business and (for major players, at least) potentially a lucrative investment. Therefore, it is probably unrealistic to expect patent holders and trolls to police themselves, since they have a disincentive to do so. It may be wise for the administration to exert at least a little pressure on major interested parties, so that the situation does not swing too far out of balance and we remain mindful that the underlying constitutional purpose of the patent system is to foster innovation.